- The Home Office’s stated purpose is “working together to
protect the public”. Protecting the public covers policing, crime
reduction, counter terrorism, border control, and identity
management. The Department delivers some front line services, such
as immigration enforcement and the issuing of passports, directly
through Executive Agencies. Other front line services, such as
policing and crime reduction, are delivered through arms length
partnership arrangements with other bodies, including six
Non-Departmental Public Bodies and the 43 police forces in England
and Wales.
- For 2008-09, the Home Office has a gross budget of £11.8
billion. Around 71 per cent is passed on through grants to partner
organisations, principally police authorities, which help deliver
the Department’s objectives. The remaining 29 per cent funds the
Home Office’s Executive Agencies which are the UK Border Agency
(operating in shadow form until 31 March 2009)(£1.9 billion); the
Identity and Passport Service (£0.5 billion) and the Criminal
Records Bureau (£0.1 billion), plus its own running costs (£0.9
billion). The Department receives £1.4 billion in income,
principally from fees and charges for public services.
- Financial management is the system by which the resources of an
organisation’s business are directed and controlled to support the
organisation’s goals. Good financial management is an essential
element of strong corporate governance. It forms part of the
foundations of an organisation, underpinning service quality and
improvement, and is the basis of accountability to stakeholders for
the stewardship and use of resources. Effective financial
management helps an organisation manage its budgets; allocate
resources and make decisions supported by an understanding of the
relationship between resource consumption and performance; and so
deliver its services cost-effectively.
- The Comptroller and Auditor General issued a disclaimed audit
opinion on the Department’s Resource Accounts for 2004-05.
Following complications arising from the introduction of a new
accounting system, the Department had failed to reconcile its cash
records, was unable to provide an adequate audit trail to support
accounting entries and, as a consequence, was unable to produce
auditable Financial Statements. The Public Accounts Committee
reported in July 2006 on the weaknesses in financial management at
the Home Office that caused it to fail to produce proper accounts.
The Committee recommended improvements in the Department’s basic
financial systems and processes, in the financial skills and
capacity of staff and a greater emphasis on the corporate
importance of financial management and accounting at senior levels
of the Home Office. In response, the Home Office began a
substantial programme of reform.
- The Department initiated a programme of improvement more than
two years ago, so this report examines:
- the Home Office’s organisation and the progress made in
delivering improvements in its financial management (Part 1);
- the recent financial performance of the Home Office (Part 2);
and
- how far the Home Office has integrated good financial
management into its business (Part 3).
Main findings
On the progress made in improving financial
management
- We found that the Home Office has made substantial improvements
to its financial management since 2006. The Department recently
commissioned IPF Ltd to independently moderate a self-assessment of
its financial management. That review, conducted between July and
November 2008, reinforces our findings. It concluded that “the Home
Office has made huge strides within the past four years in
improving the strength of financial management from what was a
patently low base. Indeed we would be of the view that the Home
Office is extremely well placed in meeting the Treasury and Head of
the Accountancy Profession’s aspirations in respect of financial
management standards”. While significant progress has been made,
the Department recognises that there is still more to do to meet
its aims for the financial management of its business, and the
Treasury’s ambition to embed “world class” financial management
across central government. In order to meet this objective, the
Department is in the process of refreshing its Finance Improvement
Strategy.
On recent financial performance
Managing against budgets
- The Home Office reported in its Autumn Performance
Report 2008 that it met all of its Public Service Agreement targets
for 2004 to 2007, exceeded its targets for efficiency savings, and
did so within budget.
- Over the five years to 31 March 2008, the Department has
controlled its resource consumption effectively, managing it
consistently between 96 and 100 per cent of the limits approved by
Parliament. Over the same period, the Department has consistently
underspent against its annual capital budgets, in one year by as
much as 25 per cent, giving rise to a cumulative underspend of £725
million. The Department is improving its use of capital budgets
and, in 2007-08, reduced the in-year underspend to £48 million (6
per cent) from £330 million in 2006-07 (25 per cent). The
Department has not used its accumulated capital reserve, which has
since been capped by the Treasury in the funding settlement
covering 2008-09 to 2010-2011 at a maximum of £292 million.
- In 2007, the National Audit Office reviewed the Home Office’s
data systems which it uses to measure performance against its
Public Service Agreements. We found that three of the Home Office’s
data systems were fit for purpose, while the remaining seven were
broadly appropriate but needed strengthening. Whilst we have not
reviewed the Department’s Comprehensive Spending Review 2004
efficiency savings outturn in full, in our review in February 2007,
we considered £1,377 million of the Department’s reported savings
and assessed 32 per cent (£445 million) as fairly representing the
efficiencies made and 68 per cent (£932 million) as representing
efficiencies but raising some measurement issues. We have not yet
reviewed the data systems underpinning the Department’s more recent
Public Service Agreement targets, nor the value for money savings
under the Comprehensive Spending Review 2007. We will review each
of these in due course.
Understanding links between resources and
performance
- The extent of the Department’s understanding of its
delivery costs varies across the range of activities and objectives
for which it is responsible. The Department understands
the direct costs of delivering specific services, such as issuing
passports, relatively well, as the components of the service can
often be individually costed. The Department examines in less depth
the costs of activities which have less clearly defined outputs or
activities which are delivered through partner bodies.
- The Department does not yet, but is taking steps to
more fully understand the impact of funding decisions on
performance outcomes. At a national level, increases in
funding for priority outcomes, such as reducing crime, have been
accompanied by improved performance, but the causal links have not
been established firmly. Similarly, the Department does not yet
have a full understanding of how local variations in resourcing
impact on outcomes. Establishing the links between the use of
resources and delivery outcomes is undoubtedly challenging, because
of the complex range of factors that impact on outcomes, and
remains a challenge across the public sector. To assist in
addressing this challenge, the Home Office is undertaking a project
entitled “Matching Resource to Priorities”. Complexity is greater
where delivery is devolved to partner organisations. In 2008-09,
over £8 billion will go in grants to delivery partners, including
£5.4 billion to police forces through the main police grant. The
forces are operationally independent and make spending decisions
based on local priorities. The Home Office is improving its tools
for monitoring devolved funding and is developing its understanding
of the links between resource consumption and performance.
Charging for services
- Accurate cost modelling for chargeable services remains
a challenge in some areas. The Department is required to
charge for some of the services it provides. It is allowed to make
a surplus on some services to foreign nationals, but generally,
like other government departments, where UK citizens pay for
services, such as passports and criminal record checks, the Home
Office is required to set fees and charges only to levels that
cover the costs of providing the service. We found, however, that
owing to changes in costs in 2007-08, fees charged for the
provision of passports and criminal record checks gave rise to
unplanned surpluses of £12 million and £10 million respectively.
The main reason for the Criminal Records Bureau surplus was a
favourable HM Revenue and Customs ruling on VAT, while at the
Identity and Passport Service the principal factor was the delay to
the roll-out of the Interview Office Network.
On managing the Home Office’s business
- We considered how far the Home Office has integrated five
widely accepted aspects of good financial management into its
business: financial governance and leadership; financial planning;
financial decision making; financial monitoring and forecasting;
and financial and operational reporting. Our findings are set out
below.
Financial governance and leadership
- An improved financial management culture is in place at
the top of the Home Office. Strong, visible leadership
from the top, focusing on risk management and improving the
financial capability of senior managers, has improved the financial
management culture at the top of the Department. The appointment of
a qualified accountant to the Board in 2005 emphasised the
corporate importance of finance. This appointment, together with
the leadership of the Permanent Secretary, has been an important
factor behind the Department’s improvements to its financial
management. Regular Operating Reviews of each business area,
examining all aspects of performance including finance, led by the
Permanent Secretary, have enhanced senior level accountability. The
Department also took the initiative in expanding the scope of the
existing internal audit programme to assess whether basic financial
procedures were being followed.
- This improved financial management culture, however, is
not yet embedded throughout the organisation. Review work
carried out by the Department’s internal audit team during the last
year found that there is significant scope for improvement in
compliance with core financial management policies and procedures
across a range of areas, including budget management, fixed asset
and inventory management, the handling of pay and allowances and
the use of procurement cards. The Home Office has over 24,000
employees and instilling lasting cultural change on this scale
will, of course, take time. The ongoing support of senior
management will also be important to continue promoting and
embedding the Department’s financial management improvement agenda
throughout the business.
- The recruitment and retention of key finance staff have
been difficult at the Home Office, in common with much of the
public sector. To enhance financial expertise and
capacity, over the last 2 years, the Home Office has increased the
number of professionally qualified finance staff in core finance
roles. The Department is also piloting membership of a well
established Government Finance Profession graduate trainee
accountant scheme to develop a cadre of in-house finance
professionals. Although trainees will be able to fill some gaps
immediately, it will take time for the scheme to supply candidates
capable of filling senior vacancies: some five years for manager
grades, where external recruitment is most difficult. The
Department recognises the need to develop staff with both
professional finance skills and the acumen to use these skills to
add value to the Department in areas where a generalist may be less
well equipped to do so.
Financial planning
- The Department has improved its financial planning and
budgeting, but short term funding settlements are still affecting
the delivery of objectives. Although its single largest
element of funding, the distribution of grants to police
authorities, has been on a multi-year basis since 2006-07, other
recipients of grants from the Home Office rely on short term
agreements, typically single year settlements underpinned by longer
term indicative budgets. Single year funding agreements for local
Crime and Disorder Reduction Partnerships meant that the
Partnerships largely used these funds to help manage the
consequences of violent crime, rather than tackling its root
causes. Internally, budgets are now being delegated in advance of
the financial year to all business areas and it is important that
they are cascaded swiftly thereafter. For example, although all
Non-Departmental Public Bodies were given indicative three year
budget settlements, two major Non-Departmental Public Bodies told
us that earlier firm annual budget delegation would help timely
business planning.
- New Home Office bodies have taken some time to
establish their financial management on a firm footing. In
recent years, the Home Office has set up important new business
areas and bodies: the Office for Security and Counter Terrorism;
the Serious Organised Crime Agency; the National Policing
Improvement Agency; and the Independent Safeguarding Authority.
Getting new organisations up and running effectively is
challenging. We found instances where local financial management
capacity was insufficient to deal with the initial challenges these
bodies faced.
Financial decision making
- Submissions to decision-makers for important policy and
operational decisions are usually supported by appropriate
financial analyses. The Department has put appropriate
governance structures in place to monitor and provide advice to the
business on the quality and completeness of financial information
provided to decision makers.
Financial monitoring and forecasting
- The quality of the Department’s financial monitoring
and forecasting has improved and its key financial systems are
capable of supporting the Home Office’s business needs, but staff
find them difficult to use. Working round the systems
reduces compliance, causes errors and hinders the production of
timely, good quality financial information. To mitigate the risk of
management receiving inaccurate information, finance staff need to
spend substantial time making sure that financial data is reliable.
The monthly Finance Report is therefore provided to the Board 16 to
20 working days after the month end, compared to the Treasury
target of 10 days. The Department has plans in hand to address
these issues and, in December 2008, completed the first phase of
its Central Finance Process Improvement Review.
Financial and operational reporting
- The Home Office has improved the accuracy and
reliability of financial information reported internally and
externally. We found that the Department has improved
in-year budget management and reallocated resources to areas
experiencing budgetary pressure or deemed to be high priority
through its mid year review process. The Department’s delivery of
its Resource Accounts for 2007-08 with an unqualified audit
opinion, before Parliament’s summer recess, was an important symbol
of the progress it has made.
Financial Management Conclusion
- The Home Office has substantially improved its financial
management, including its overall financial governance, its
financial planning, budgeting, monitoring, forecasting and
reporting, and its arrangements to support financial decision
making. However, the Department has not reached the stage of
maturity at which good financial management is part of “business as
usual” operations. Continued effort and emphasis is required to
consolidate the improvement which has been achieved, and to deliver
the further improvements in financial management that will assist
the Department in maximising the value for money it delivers to
citizens and non-citizens alike. In particular, the importance of
good financial management and financial management skills is not
yet fully apprehended throughout the Department; the strategic
management of its large capital programme has not been responsive
enough to avoid large underspends; the Department does not have
enough information on the relationship between resource
requirements and outcomes; and financial management arrangements
have not been sufficiently resilient in supporting organisational
change. The Department recognises these issues and is updating its
Finance Improvement Strategy accordingly. The following
recommendations are intended to improve financial management across
the Department.
Recommendations
- Against the above background we recommend as follows:
- The Home Office has made substantial improvements to
its financial management in recent years, but has not reached the
stage of maturity at which good financial management is part of
“business as usual” operations. Following on from this
report and that of IPF Ltd, the Department should now set out a
clear aspiration for its desired standard of financial management.
To achieve this aspiration, the Department should set out an
updated action plan to address the areas of improvement that are
needed.
- Newly established Home Office business areas and bodies
have taken some time to establish their financial management on a
firm footing. The Department should identify how it can
provide better financial management support to new bodies at
inception and during their early years.
- The Department has consistently underspent against its
capital budgets, generating a cumulative underspend of £725 million
over the last five years. It should identify its capital
expenditure priorities, and underpin its capital programme with
robust project management and budgets that are taut yet realistic.
The Department should also put arrangements in place to improve
individual project deliveries so that it can identify and release
funds that are no longer required so that they may be deployed
elsewhere on the same timescale.
- The forecasting of some costs remains challenging for
the Department in areas where fees for services are required to be
set to break-even levels, such as passports and criminal record
checks. Demand and cost modelling may become more challenging in
the uncertain financial environment. The Department should
carry out further analysis of forecast demand and costs for these
services to improve their ability to set fees at levels that will
more closely meet break-even targets.
- Management of funding to partners has improved but
short term funding settlements are still affecting the delivery of
objectives. Within the existing annuality restrictions, to
help improve value for money, the Department could provide longer
term stability of funding and increase lead times when delegating
budgets to delivery partners.
- The Department has increased the number of
professionally qualified finance staff it employs and is rolling
out programmes to enhance and build financial skills and capacity
more widely, but it will be some time before the benefits are
realised. The Department should improve succession
planning and recruitment to bridge the skills gap. The Department
should evaluate the benefits derived from its finance
professionalism programmes and use the results of this assessment
to accurately match its financial management capacity levels to its
specific business needs.